SECTION 5. ALLOCATION AND

ATTRIBUTION RULES FOR INTEREST

This section applies for purposes of determining the extent to which interest is attributable or properly allocable to income of the related person which is neither subpart F income nor ECI.

(a) Interest properly allocable or apportionable to non-subpart F income

Interest is not eligible for the section 954(c)(6) exception to the extent the deduction for the interest payment is allocated and apportioned under section 954(b)(5) and Treas. Reg. § 1.954–1(a)(4) and (c) to reduce the related CFC payor’s adjusted gross FBCI (as defined in Treas. Reg. § 1.954–1(a)(3)), adjusted gross insurance income (as defined in Treas. Reg. § 1.954–1(a)(6)), or any other category of income included in subpart F income under section 952(a).

In general, interest that is allocated and apportioned to income that is not subpart F income is eligible for the section 954(c)(6) exception (subject to the rules below for ECI), even if interest deductions exceed the gross income of the related CFC payor in the year paid or accrued. However, interest is not eligible for the section 954(c)(6) exception to the extent interest deductions create (or increase) a deficit which under section 952(c) may reduce the subpart F income of the related CFC payor or another CFC.

(b) Interest properly allocable or apportionable to non-ECI

Interest is not eligible for the section 954(c)(6) exception to the extent

the deduction for the interest payment is allocated and apportioned under section 882(c) and Treas. Reg. § 1.882–5, to gross income of the related CFC payor that is (or is treated as) ECI, or as expressly provided by or pursuant to a U.S. income tax treaty or accompanying documents (such as an exchange of notes), is allocated and apportioned to gross income of the related CFC payor that is attributable to a U.S. permanent establishment.

This paragraph applies if, in a single taxable year, the related CFC payor incurs both interest expense that, but for the application of section 5(b) of this notice, is eligible for the section 954(c)(6) exception (section 954(c)(6) interest expense), and other interest expense. In such a case, the amount of interest expense that is treated as allocated and apportioned to gross income of the related CFC payor that is (or is treated as) ECI, or under an applicable treaty, that is allocated and apportioned to gross income of the related CFC payor that is attributable to a U.S. permanent establishment, is the related CFC payor’s interest expense for the taxable year multiplied by a fraction equal to the amount of section 954(c)(6) interest expense over the related CFC payor’s total interest expense incurred during the taxable year.

Interest is not eligible for the section 954(c)(6) exception to the extent interest deductions create (or increase) a net operating loss carryover that is effectively connected with the conduct of a trade or business within the United States (or that is attributable to a permanent establishment, in the context of an applicable U.S. income tax treaty).